The Effect of 'Check the Box' on U.S. Multinational Tax Rates
33 Pages Posted: 15 Jul 2015
Date Written: June 28, 2015
This paper examines changes in current foreign effective tax rates for U.S. versus foreign multinational corporations (MNCs) after a U.S. tax change known as check-the-box (CTB) became effective. We find that U.S. MNCs reported current foreign effective tax rates that declined approximately 9 percentage points more than foreign MNCs in the post-CTB period, suggesting that CTB allowed these U.S. firms to engage in more effective foreign tax planning. Because the U.S. taxes foreign income up to the U.S. tax rate when repatriated, we examine whether these foreign tax savings were maintained, or whether they were offset by additional U.S. tax. We find no significant change in U.S. tax rates on foreign income in the post-CTB period suggesting that more foreign earnings were retained offshore after CTB became effective. Thus, CTB likely played a role in maintaining the competitive balance between U.S. and foreign MNCs worldwide effective tax rates as found in prior studies. Finally, given the significant change in foreign effective tax rates, we examine whether investors reacted to CTB announcements, but we do not find a stock price response.
Keywords: Check the Box, International Tax, Tax Avoidance, Repatriation Policy
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